...or does it ruin the sound??

I am using audacity.

Ive noticed that "clipping" adds an extra layer of crunching distortion to metal guitars, though I must admit, it is somewhat harsh on the ears.
When the guitars are not maxed out (to the point of getting clipped) the sound lacks crunchiness (compared to the clipped version of the same track)

Could someone explain the deal to me in not-so-technical terms, as I am just trying to understand how this is supposed to work. What are the benefits of clipping, if any??

The reason it sounds harsh is that the clipping is digital distortion. Digital distortion adds extra frequencies to the sound which are mathematically related to the original signal. Traditional hot recorded sounds that are done on analogue equipment add frequencies that are harmonically related to the original sound. This is what people talk about when they describe being able to 'push' analogue recording systems harder to get a warmer saturated sound. With digital systems, if you attempt this you get digital distortion which does not sound good to most ears.
However as with everything in audio, trust your ears - if it gives you the desired effect then go with it. Personally its not a sound I'd go for.

Digital clipping is a great way to sound completely fucking amateur and bedroom-ish. I would avoid it at all costs.

If you want to get a bit more crunch in your guitar tone, put a Tubescreamer in front of your amp with these settings: Tone 10, Volume 10, Drive 0.

Clipping isn't ALL bad. It can sound great when you're using the right Fuzz pedal. See the song "Glasgow Mega Snake" by Mogwai. Excellent use of clipping.

Well like I said above, you should just trust your ears - although when I'm working I will never let something distort/clip digitally, that's not to say you shouldn't do it if you think it sounds right. Admittedly it's not a commonly done thing but distorted guitar wasn't a commonly done thing until people started doing it! (for the record, I know that's a completely different thing - just making a point). With home recording setups now people seem to follow a very strict rulebook with regards to recording - from working with a lot of more 'long in the tooth' producers in real studios I've seen first hand that the best sounds aren't always achieved with conventional methods.
If you want to use analogue distortion maybe you should buy a good front end for your setup to cook your signal a bit before it gets recorded. You could always do this with an analogue desk and just turn the channel right up or, depending on how much money you want to spend, look at a half decent preamp/channel strip.

Im not trying to clip my guitar to get distortion (I got my distortion pedal for that) and I dont feel that clipped guitar tracks sound magically better than a non-clipping track....just that there is some distortion that appears at the cost of sounding harsh.

Ive noticed waveforms of (professionally recorded) metal tracks do not show clipping, yet have a louder sound. I cannot get my tracks to sound as loud without seeing clipping in the wave form. The resulting sound is rather abrasive (in a good way) while at the same time sounding harsh to the ears.

Problem - It either clips or it isnt as loud.

This is pretty much the mindset behind the "loudness war". My advice: just don't make your songs as loud. The guitars don't have to have extreme volume, they just need to have the right volume in comparison to the other instruments in the mix.

Like Andyminion said, you'll probably need a good preamp. Sansamp sells some really good ones.

I know you already have distortion but the clipping you talk about is a form of distortion. The reason I recommended you look at ways of involving analogue distortion is because you said you thought the clipping added to the sound but was too harsh.
I also agree with the above, don't worry too much about making your audio too loud as it is almost always at the expense of audio quality and is one of many reasons why so much modern music sounds awful.
Without using mastering tools it is very unlikely you will be able to get a perceived volume level that matches professional albums. You hear these albums as loud because of the use of multi-band compression and skillful EQing (although, a lot of the time it tends not to be too skillful at all). Most budget/home studios use either a plug-in like a Waves Ultramaximizer or IK Multimedias TRacks software to increase the apparent volume. Another (possibly better, depending on who you ask) alternative would be to get a "mastering processor" such as the TC Electronic Finalizer or DBX Quantum. However depending on your budget these may not be an option.

Solution - Mastering. The mastering chain I have been using lately is the Kjaerhaus Audio Classic Master Limiter preceded by two Gclip set to 1.5dB gain each. No clipping, sounds loud, and retains dynamics. If I had some better plug ins, or even some nice hardware, I'd get it quite a bit louder without losing any quality.

Avoid clipping - the distorted toned sound wave being played through the speaker of your guitar amp is clipped, and that is where you want to get distortion in your tone. Mastering will allow you a louder sound while maintaining/enriching sound quality, see mattp's post.

I dont mean to sound like a cheapskate, but the thing is, Im trying to milk as much as possible from freeware like audacity etc. Theres no way I am going to spend cash on expensive software or studio equipment.
So I took mattps solution and ran a search for "free mastering software" and heres what I got...

http://www.hitsquad.com/smm/cat/MASTERING/

Any of those names sound familiar to anyone?
It looks like theres a load of freebies in there. I will explore these things later in the day.

Thanks for all the input people!

Kjaerhaus classic master limiter, Gclip, and Reaper are all free...